Streamlined Rulemaking for the FTC’s Consumer Protection Mission?

Guest Post by Dee Pridgen

I was recently invited to testify at the March 17 hearing of the Senate Commerce Committee, Subcommittee on Consumer Protection, Product Safety and Insurance on some proposed FTC reforms that had previously been passed as part of the House bill on consumer financial protection. This was a follow-up to hearings held in February by the full committee. The proposals being discussed included:

• substituting APA informal rulemaking procedures for the FTC’s existing unwieldy and cumbersome Magnuson Moss rulemaking proceedings,
• providing the FTC with authority to seek civil penalties for direct violations of the statute, rather than only for violations of rules and orders, and 
• providing the FTC with explicit authority to pursue aiders and abetters of FTC Act violators.

I testified in favor of all three proposals. Due to the spotlight on healthcare reform this week on Capitol Hill, this hearing did not get much attention (outside of the affected industries) but these consumer protection proposals should be supported.

FTC Commissioner Thomas Rosch testified in favor; Edward Mierzwinski, Consumer Program Director of the U.S. Public Interest Research Group, spoke in favor. Linda Woolley of the Direct Marketing Association spoke against, as did Timothy Muris, former chair of the FTC and now a professor at George Mason University School of Law. Commissioner William Kovacic was not at the hearing but provided a statement opposing the proposals. All the statements of these witnesses, including mine, can be found here.

I favor these proposals because the current Magnuson-Moss rulemaking procedures are so cumbersome that they have become a “dead letter.” FTC is now relegated to issuing industry guides, which do not have the force of law, responding to directives of Congress to promulgate regulations under specific statutes, such as the Telemarketing Sales Act, or bringing individual adjudications resulting in injunctions or cease and desist orders. To say that the FTC should keep this current process is basically to say they should not have the power to issue industry-wide rules without a specific Congressional mandate. The opponents have said that the FTC with APA rulemaking power would be like a “kid in a candy store,” or the “FTC on steroids” because the statute broadly prohibits all “unfair and deceptive trade practices.” However, I point out that the law of “unfair and deceptive trade practices” has been constrained and tempered since Magnuson Moss was passed in 1975, mainly by FTC policy statements using consumer injury cost-benefit ideas in unfairness policy and implementing a “reasonable consumer” standard in deception doctrine, so the need for the “safeguards” of Magnuson Moss is diminished. Also, there is no reason to believe that the FTC would go into regulatory overdrive if it had APA rulemaking authority to enforce its general unfair and deceptive practices jurisdiction. If the FTC uses APA rulemaking, it will be governed by the safeguards of the APA, including notice requirements, regulatory statement of basis and purpose, and judicial review. All agency rules must comply with other safeguards such as the Regulatory Flexibility Act, the Congressional Review Act and review by the Office of Information and Regulatory Affairs.

The Direct Marketing Association spokesperson expressed concern that the FTC would use APA rulemaking authority to limit innovation in internet marketing by requiring that consumers “opt-in” to the use of online profiling to develop focused ads on websites. Tim Muris stressed that the FTC would likely go back to the “binge” of regulating that occurred in the late 70s if given APA rulemaking authority. I say “times have changed” and the FTC needs the tools that other agencies have to issue binding rules in consumer protection.

President Obama Speaks on Financial Reform and the Consumer Financial Protection Agency

President Obama's Saturday morning address was devoted to the need for financial reform legislation.  A significant proportion of his address urged the establishment of a truly independent Consumer Financial Protection Agency. The President said that the CFPA was a key component of any meaningful financial reform. He spoke favorably of the Senate bill recently introduced by Senator Dodd. But a number of posts to this blog --- here, here, here, and here --- have claimed that the Dodd bill is weaker than the legislation passed by the House, among other reasons because it would place the CFPA within the Federal Reserve and give banking regulators veto power over its regulations.  View the President's address:

The Hot News Doctrine Rides Again

by Paul Alan Levy

 Does a firm that expresses an opinion "own" that opinion, and thus have the ability to prevent others from reporting on the fact that the firm has expressed the opinion?  When a newspaper or other entity reports some facts, does it "own" the news and can it prevent others from truthfully reporting the same facts?  Granting ownership in important public facts would seem to be at odds with intellectual freedom, yet it takes resources to develop the facts and news organizations have been struggling to invoke concepts of ownership as a way to ward off competition for readers from online news web sites that re-report what the established media are reporting.

A ruling yesterday by U.S. District Judge Denise Cote holds the online financial reporting firm theflyonthewall.com liable for both copyright infringement and misappropriation for engaging on the business of obtaining trading recommendations issued by the financial analysts at major brokerage and investment firms and publishing them before the market opens.  As in many situations involving a hot news claim, the defendant was also republishing copyrighted content, thus making it much harder to sympathize with the defendant. At the same time, one might well wonder why copyright law does not provide sufficient protection for the public interest in encouraging the creation of the underlying intellectual work, and whether the threat to freedom posted by the hot news doctrine is justified as a matter of public policy by a need to foster the creative endeavor.  

Although the so-called hot-news doctrine has been acknowledged in strong dicta in a number of Second Circuit cases, most notably NBA v Motorola in 1997, that court has not issued a holding in the modern era on whether the Supreme Court’s World War I era ruling in International News Service v. Associated Press survives either copyright preemption or the First Amendment.  With the defendant declaring its intent to appeal, the case will likely set up a major test of this hoary doctrine.

Daniel Carpenter's Times Op-Ed on Why the CFPA Should Not be in the Fed

Here.  Excerpts:

The Fed has a long and largely undistinguished history of consumer protection. During the 1970s, officials at the Fed opposed the Community Reinvestment Act, which attacked home lending discrimination, and the Home Mortgage Disclosure Act, which compelled banks to reveal their lending patterns.

When these became law, the Fed limply enforced them; it gave the same treatment to the Home Ownership Equity Protection Act, passed in 1994.

* * *

Embedding consumer protection in the Fed could be worse than imperfect. By giving the imprimatur of a consumer protection office to an agency that has long resisted consumer protection, Congress risks creating a false sense of security among policymakers and the public. The Fed’s politically reactive posture is the exact opposite of the sustained care that consumer financial protection demands.

Viacom's Slippery Marketing Practices Revealed in Its Copyright Suit Against YouTube/Google

by Paul Alan Levy

The parties to litigation often abuse the process of demanding that court documents be kept under seal to protect confidential information, using the claim of a need for confidentiality for the ulterior objective of preventing the disclosure of facts that are just publicly embarrassing because they contradict the litigant's public relations positions.  It is with great interest, therefore, that we noted the mass unsealing of previously sealed materials from the Viacom lawsuit against Google and YouTube.

Very much worth a read is the public statement from YouTube's counsel, and the underlying summary judgment brief just revealed publicly after the court's seal was lifted.  Simply put, according to the statement, at the same time that Viacom has been suing Google for its failure to police adequately the placement of its copyrighted content on YouTube, Viacom was, itself, secretly placing clips from its own copyrighted content on YouTube, while going to elaborate lengths to make it appear as if the material was stolen and to conceal its own involvement in placing the material on YouTube.  Not, apparently, as a way to set Google up for suit, but because the posting of apparently stolen content was seen as a way to enhance the public interest in the underlying works. 

A particularly juicy excerpt: "Viacom's efforts to disguise its promotional use of YouTube worked so well that even its own employees could not keep track of everything it was posting or leaving up on the site. As a result, on countless occasions Viacom demanded the removal of clips that it had uploaded to YouTube, only to return later to sheepishly ask for their reinstatement. In fact, some of the very clips that Viacom is suing us over were actually uploaded by Viacom itself."

Some Bad News Buried in the Dodd Financial Reform Bill?

The financial reform bill introduced by Sen. Chris Dodd on Monday would not create an independent Consumer Financial Protection Agency as does the financial reform bill passed earlier by the House of Representatives. Rather, Sen. Dodd's bill would create a new bureau within the Federal Reserve. Not to worry. We were told that this didn't matter much because the bureau would be truly independent of the Fed, with separate funding and its own rulemaking and enforcement authority.

Maybe not. Credit Slips has posted a short piece by University of Connecticut law professor Pat McCoy that explains that the Dodd bill includes an "obscure measure that would fatally hamstring the [Fed's] new 'Bureau of Consumer Financial Protection.'" What is it you ask? I'll let McCoy tell you:

Today’s bill, however, would gut both objectives [that is, consumer protection and the safety and soundness of the banking industry] by giving any federal banking regulator the unprecedented right to appeal consumer protection rules issued by the BCFP to a new Financial Stability Oversight Council, made up in part of – guess who? -- federal banking regulators. The Council could overturn any BCFP rule by a 2/3 vote[.] ... In effect, the bill hands a nuclear option to the same federal banking regulators who failed to protect consumers and the financial system during the housing bubble.

Yikes!

Online (Non) Privacy

Today's New York Times explains "How Privacy Vanishes Online."  Among other things, the article explains how, by combining information from a variety of sources, someone can correctly "guess" a lot of people's social security numbers:

Even more unnerving to privacy advocates is the work of two researchers from Carnegie Mellon University. In a paper published last year, Alessandro Acquisti and Ralph Gross reported that they could accurately predict the full, nine-digit Social Security numbers for 8.5 percent of the people born in the United States between 1989 and 2003 — nearly five million individuals.

Social Security numbers are prized by identity thieves because they are used both as identifiers and to authenticate banking, credit card and other transactions.

The Carnegie Mellon researchers used publicly available information from many sources, including profiles on social networks, to narrow their search for two pieces of data crucial to identifying people — birthdates and city or state of birth.

That helped them figure out the first three digits of each Social Security number, which the government had assigned by location. The remaining six digits had been assigned through methods the government didn’t disclose, although they were related to when the person applied for the number. The researchers used projections about those applications as well as other public data, like the Social Security numbers of dead people, and then ran repeated cycles of statistical correlation and inference to partly re-engineer the government’s number-assignment system.

Federal Courts' More Constructive Response to RECAP?

by Paul Alan Levy

Last year I expressed concern in this space that the federal courts seemed to be responding to the RECAP the Law project -- which is designed to build up a database of federal court records that would be available free of charge -- by using scare tactics to discourage participation.  Now comes the news that the Judicial Conference has approved changes that could make federal court records more readily available for free to occasional users.  Under the changes, users can get $10 worth of downloads for free every quarter (rather than $10 per year), and audio recordings of court hearings will be available for $2.40 rather than the current $26.

Journal of Consumer Affairs Spring 2010 Issue Available

Here.  From the Table of Contents:

Are Consumers Disadvantaged or Vulnerable? An Examination of Consumer Complaints to the Better Business Bureau (p 3-23)
DENNIS E. GARRETT, PETER G. TOUMANOFF

The Effects of Advertising, Social Influences, and Self-Efficacy on Adolescent Tobacco Use and Alcohol Consumption (p 24-43)
BRIAN R. KINARD, CYNTHIA WEBSTER

Credit Counseling to Help Debtors Regain Footing (p 44-69)
JEFF JIANFENG WANG

Which Households Think They Save? (p 70-97)
YOONKYUNG YUH, SHERMAN D. HANNA

More Than a Penny Saved: Long-Term Changes in Behavior Among Savings Program Participants (p 98-126)
CÄZILIA LOIBL, MICHAL GRINSTEIN-WEISS, MIN ZHAN, BETH RED BIRD

Examining the Effect of Expressing a Quantitative Goal on Consumer Savings (p 127-154)
CÄZILIA LOIBL, ROBERT L. SCHARFF

Concern with Immediate Consequences Magnifies the Impact of Compulsive Buying Tendencies on College Students' Credit Card Debt (p 155-178)

Consumer Biases and Competences in Company Stock Holdings (p 179-212)
CHRISTINE W. LAI, JING JIAN XIAO

Cohort Effects of Household Expenditures on Food Away from Home (p 213-233)
HUA ZAN, JESSIE X. FAN

Colston E. Warne Lecture: Is It Time for Another Round of Consumer Protection? The Lessons of Twentieth-Century U.S. History (p 234-246)
LIZABETH COHEN

ACCI Memorial Paper: The Scholarly Legacy of E. Scott Maynes (p 247-258)
LOREN V. GEISTFELD

Interaction of Law and Ethics in Matters of Advertisers' Responsibility for Protecting Consumers (p 259-264)
IVAN L. PRESTON

Is the Obama Administration More Open Than Its Predecessor?

On his first full day in office, President Obama issued a memorandum on the Freedom of Information Act (FOIA). He quoted Justice Louis Brandeis's famous line that "sunlight is said to be the best of disinfectants" and directed federal agencies to "adopt a presumption in favor of disclosure." A couple months later, Attorney General Holder followed suit and "strongly encourage[d] agencies to make discretionary disclosures of information." "An agency," he said, "should not withhold records merely because it can demonstrate, as a technical matter, that the records fall within the scope of a FOIA exemption."

Has this new attitude made a difference so far? According to a review conducted by the Associated Press, the answer is no. The AP reviewed FOIA reports "filed by 17 major agencies [and] found that the use of nearly every one of the law's nine exemptions to withhold information from the public rose in fiscal year 2009, which ended last October." The AP Report is consistent with a another new report from the National Security Archive showing that most federal agencies have not implemented the Obama and Holder memoranda.

Two things worth noting: First, President Obama was in office for only nine months of the period studied by the AP, and it may take time for the new policies to take effect within the massive federal bureaucracy. Second, there are indicia of open government other than how agencies respond to FOIA requests, such as how much information agencies disclose on their own on websites and elsewhere. But the early returns are not good. The Obama Administration needs to step it up on transparency.

A Year and a Half After the Economy Crashes, and This Is What We Get?

by Robert Weissman

 A year and a half after the collapse of Lehman Brothers and Wall Street's subsequent implosion - and amidst the worst recession of the last 70 years - Congress has failed to adopt a financial reform package to rein in Wall Street and prevent a recurrence of the crisis. 

There is a single overriding reason for this state of affairs: Wall Street and the big banks continue to exert overwhelming and improper influence over the policymaking process.

That is one reason why breaking up the big banks is arguably the most important reform needed. We need to break up concentrations of financial power to rescue our democracy, diminish excessive risk-taking by large institutions that expect to be bailed out in case of failure, improve service for consumers and communities, and preserve financial stability.

Unfortunately, the new Senate proposal, like the already approved House bill, fails to meet this challenge.

Senate banking committee Chair Christopher Dodd’s new draft financial reform bill is the product of a drawn-out and apparently still ongoing negotiation. The bill is long and complicated, and it will take some time to digest all of its provisions. It contains some important positive reforms but also some gaps and areas of concern. 

On the contentious issue of the Consumer Financial Protection Agency -- downgraded to a Bureau of Consumer Financial Protection in the Dodd bill -- the story is mixed. Rather than being created as a standalone agency, the bureau is lodged at the Federal Reserve, an agency that utterly failed to exercise its consumer protection duties during the run-up to the financial crash. On the positive side for consumers, it does appear that the bill gives the bureau substantial autonomy, as well as rulemaking and enforcement power. Had a strong agency been in place at the turn of the century, the worst lending abuses that followed would have been avoided, and the financial crisis would have been noticeably less severe. 

The bill also gives the bureau authority to prohibit the practice of forced arbitration, in which companies force consumers to resolve disputes before private, secretive, company-chosen tribunals instead of public courts.

"Did a Lack of Consumer Protection Cause the Financial Crisis?"

Tomorrow at noon, the Cato Institute's Policy Forum will host what promises to be an interesting and lively  debate over that question, featuring Janis Bowdler, National Council of La Raza; Thomas Durkin, Former Economist, Federal Reserve Board; Ed Mierzwinski, U.S. PIRG; and Todd Zywicki, George Mason University School of Law. Moderated by Mark A. Calabria, Director, Financial Regulation Studies, Cato Institute.

Here's Cato's official description, which uses the term "consumer protection" in scare quotes:

There is likely no issue more contentious in the debate over the causes of the recent financial crisis and the appropriate response other than "consumer protection." The question of whether credit was too cheap or too expensive (or predatory) is at the heart of the differing narratives of the crisis. Panelists will examine these opposing narratives and debate the merits and substance of proposed consumer protections in our financial markets, including the creation of a Consumer Finance Product Agency.

If you can't make it over to Cato's Dupont Circle headquarters, you can watch it live online.

Dodd Financial Regulation Bill Under Scrutiny from Senate Democrats

Over at PIRG's Consumer Blog, Ed Mierzwinski says that Senator "Dodd['s] Wall Street plan leans toward banks, not [the] American people." He notes that Senators such as Bernie Sanders, Sherrod Brown, and Tom Kaufman may vote "no" if the bill lacks an independent Consumer Financial Protection Agency and tough new bank regulation.

Apparently, Citizens United doesn't believe in free speech for the anti-corporate side

by Paul Alan Levy

Citizens United, fresh from its Supreme Court victory giving corporations the right to bankroll election campaigns, has sent a trademark demand letter to the Wisconsin Democracy Campaign, complaining that a Facebook page entitled "Citizens United Against Citizens United" infringes its trademark.  Apparently, Citizens United is worried that members of the public might come to the page and think that the organization "Citizens United" is attacking Citizens United, the landmark Supreme Court decision that it won. 

Although we haven't seen this issue litigated in the context of Facebook, Citizens United's demand flies in the face of the many decisions holding that an Internet gripe site (or fan site) may use the trademark of the subject of the discussion as its domain name. Under Lamparello v. Falwell, 420 F.3d 309 (4th Cir. 2005), that's even the rule in the Fourth Circuit, where Citizens United is located.  How can they possibly hope to win a case like that? 

Wisconsin Democracy Campaign's argument would seem to be even stronger, because it is using "Citizens United" in its descriptive sense, and not as a mark. It seems doubtful that Citizens United the conservative group can prevent a group of citizens who are united to support or oppose a particular proposition from referring to their effort as Citizens United For X or  Citizens United Against Y. (Otherwise, many groups that would have to change their names). It is especially hard to understand how any confusion about source could be expected to result from labeling a campaign "Citizens United Against Citizens United."

Interestingly, Citizens United asks Wisconsin Democracy Campaign to destroy all documents bearing the Citizens United trademark.  If that demand were extended to the Supreme Court, could it succeed in wiping the Citizens United decision off the books?

The Importance of CFPA Independence

In the Capitol Hill publication, The Hill. 

Senator Dodd's Bill

 The full text of the financial services reform bill introduced by Senator Dodd today, which includes a new Bureau of Consumer Financial Protection within the Federal Reserve, is available here.

At his press conference Senator Dodd seemed to emphasize that the Bureau will be independent of the Fed with a presidentially-appointed director and separate budget.

Senator Dodd To Propose Financial Reform Bill Today

As discussed in this Washington Post story, after weeks of trying to work out a bi-partisan compromise on a financial reform bill with Senator Corker of Tennessee, Senator Chris Dodd (D-CT) is going it alone. His bill would place a new consumer financial protection agency of some sort within the Federal Reserve. It would not be a stand-alone agency, as it is under the legislation passed by the House and as desired by consumer advocates and others who are not typcially viewed as consumer advocates. I have read elsewhere that, unlike the House bill, the Dodd bill will largely preempt state-law consumer protections that go beyond federal law.

Unexpected Views on the CFPA

by Jeff Sovern

A couple of reports on the Consumer Financial Protection Agency proposal that go against type:

First. 19 current and former members of the Fed's Consumer Advisory Council, including our own Alan White, have joined in a letter supporting an independent CFPA and opposing housing it in any other federal agency, including the Fed. The letter states "No agency, including the Federal Reserve, has a strong record in this regard. * * * The Federal Reserve has its hands full with responsibilities relating to safety and soundness and monetary policy."

Second, Baseline Scenario is reporting on a finding of the March 2010 survey of members of the National Association for Business Economics:

A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental.  On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.

If business economists--who are not known for supporting consumer protection initiatives--are not persuaded by the arguments against the CFPA, why should anyone be?

Immergluck on Federal Preemption of State Antipredatory Lending Laws

by Jeff Sovern

I've been reading Dan Immergluck's fine book, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market (2009).  At pages 177-78, he has as good a description of the competition among regulators for lenders as I've seen:

 

[S]ome state regulators have a vested interest in preempting state consumer protection laws.  The ability to preempt state law is perhaps the greatest source of value in the federal thrift and national bank charters. Regulators can gain political power based on the number and size of the banks that fall under their regulatory supervision. In some cases, a regulator's operations are funded by levying fees on the institutions they regulate.  This can encourage an agency to pursue policies that are friendly to banks--especially larger ones. If a regulator does not use its ability to allow banks under its supervision to preempt state consumer protection regulations, the bank may change its charter so that it is regulated by a more lender-friendly agency.  . . . Even if an agency's funding is not directly tied to the banking assets under its supervision, if fewer and fewer institutions fall under its supervisory umbrella, its power and relevance will be called into question.  In the long run, this could jeopardize the agency's very existence.

* * *

In 1974, Arthur Burns, chairman of the Federal Reserve Board, expressed concerns over a "competition in laxity" among the regulators . . . . Since then, there have been repeated concerns that banks "forum shop" to find the most comfortable regulator . . . . Since at least the late 1990s, this "race for the bottom" includes regulators vying to offer banks as much preemption power as they can. Demonstrating the important of preemption to the value of a charter type, a banking attorney was quoted in the American Banker regarding the OCC's preemption actions as asking "Why would you want a national charter but for the preemption authority?" * * *

[After noting that the Office of Thrift Supervision (OTS) moved before the Office of the Comptroller of the Currency (OCC) to preempt state antipredatory lending laws, Immergluck continues:] The OCC was not about to let the thrift charter gain a clear regulatory advantage over the national bank charter. [Immergluck then describes the OCC's preemption efforts]

Perhaps this explains why the federal regulators have been so aggressive in preempting state laws. It's not just a matter of ideology or even generating fees; it's a matter of survival.  Another argument for the CFPA, which of course would not need to preempt state laws to survive.

NY's lawyer advertising rules are unconstitutional

by Greg Beck

 The Second Circuit today affirmed a district court decision holding many of New York's 2007 lawyer advertising amendments unconstitutional under the First Amendment. Public Citizen challenged the rules on the ground that they served no legitimate consumer-protection function and instead served to protect established lawyers from competition and corporations from unwanted lawsuits. As the FTC has argued, such anticompetitive lawyer advertising rules ultimately harm consumers by leading to higher prices and lower quality legal services.